The thoroughly revised text of the German Bonds Act (Gesetz über Schuldverschreibungen aus Gesamtemissionen (SchuldVG)) passed by the German Parliament (Bundestag) in early July 2009 modernises its predecessor act, which was passed and remained virtually unchanged since its entry into force in 1899.

One of the more notable changes relates to the adaptation of creditors' meetings to annual shareholders meetings of German stock corporations in accordance with the German Stock Corporation Act (Aktiengesetz).

If provided for in the terms and conditions of the bond, the regime of the SchuldVG now allows for creditors' meetings to be summoned even if the debtor is not (already) on the brink of insolvency, allowing bond holders to vote on a number of issues which, if specific majority requirements are satisfied, can result in a (collective) amendment of the terms and conditions of the German bond.

However, it remains to be seen whether or not the terms and conditions of newly issued German bonds will indeed provide for these extended rights for bond holders, or if they will be silent on this point. If silent, this right to convene creditors' meetings and so act collectively will remain limited to crisis situations.

The measures that are eligible for collective action have been expanded considerably. Before the SchuldVG, bond holders could not (by collective action) effectively:

Any such collective actions were only possible for a very limited time and only to avert imminent insolvency proceedings against the issuer.

The SchuldVG now permits these and other measures that are aimed at stabilising the issuer, including subordination of the bond in insolvency proceedings and the exchange of the issuer.

Unless the terms and conditions provide for different procedural rules, the summoning of creditors' meetings will follow the rules set out in the Stock Corporation Act in respect of the convening of shareholders' meetings. Although the current rules under the Stock Corporation Act are somewhat restrictive and outdated, the SchuldVG already envisages upcoming changes in the Stock Corporation Act which are likely to enter into force almost simultaneously with the new SchuldVG and which will allow for electronic attendance and voting in shareholders' meetings.

The new SchuldVG therefore already provides for processes that allow creditors' decisions to be taken without the need for a physical meeting. This procedure is particularly useful where a quick decision is necessary and bond holders do not require additional information or discussions that could only be obtained in a meeting.

To allow flexible structures, the new SchuldVG leaves the details of bond holders' decision-making to the terms and conditions of the individual bond. Therefore, bondholders could arrange for rather informal procedures by allowing for written decisions or even electronic voting.

In response to the financial crisis and the realisation that investors were not sufficiently informed by their banks about the risks involved in investments in Lehman certificates, the German Parliament (Bundestag) passed a new act in early July 2009 aimed, among other things, at improving the enforceability of investor claims arising from misleading or incomplete investment advice (Act) (as defined in Directive 2004/39/EU (MiFID)). In passing the Act, Germany has responded directly to weaknesses identified as one source of investment losses to German customers.

The key change implemented by the Act requires institutions to prepare a detailed written report of the investment advice provided to clients. Before entering into any business trade based on the advice, the report must be signed by the person providing the advice and sent to the client on paper or another durable medium (such as fax or e-mail). In the case of investment advice provided by telephone, the client can waive its right to receive the report before entering into the trade, provided that both:

In cases where the institution challenges the client's right to revoke the trade, it carries the burden of proof in respect of the correctness and the completeness of the report.

The revocation right entails significant risks for institutions when providing investment advice, in particular, over the telephone. Banks and financial services providers have now started an initiative to reduce their risk by developing a joint report format.

(The initial draft of the Act had, in fact, required a recording of investment advice provided on the telephone. Following criticism that implementation costs of such a system would be extremely high, this approach has been replaced by the revocation right of the client.)

The required contents of the reports are set out in a separate ordinance and include:

The new rules will only apply to retail clients as defined in MiFID and, consequently, will not impact on investment advice provided to professional clients.

The rules are also limited to German banks and financial services providers, as well as subsidiaries and branches of foreign regulated institutions operating in Germany on the basis of the EU passport under MiFID. Institutions operating in Germany on a cross-border basis without a physical presence in Germany will not be caught by the new rules.

The Act will most likely come into force on 1 January 2010.

Institutions should adapt their internal procedures to comply with the new rules. Managers of German banks have already complained that this will require drastic changes to their systems and high costs for clients.

The implementation of the German Act to Develop the Mortgage Bond Law (Gesetz zur Fortentwicklung des Pfandbriefrechts) (Act) in May 2009 changed the German legal landscape on refinancing matters in several ways.

In addition to the changes made to the German Mortgage Bond Act (Pfandbriefgesetz), which included the introduction of aircraft covered bonds (Flugzeugpfandbriefe), the German Banking Act (Kreditwesengesetz (KWG)) has been amended by the Act to facilitate the application and practicability of German refinancing registers (Refinanzierungsregister) (Refinancing Register) in the context of European syndicated financing transactions.

Eligible entities (Refinanzierungsunternehmen) (Refinancing Entity) may register certain assets serving as consideration and/or collateral for a refinancing (Assets) in a Refinancing Register in favour of an eligible third party (Übertragungsberechtigter (Beneficiary)).

On registration of the Assets in the Refinancing Register, both the Beneficiary and the Assets enjoy substantial protection if the Refinancing Entity goes into insolvency and in respect of third party creditors' pre-insolvency access to the Assets.

The relevant provisions of the KWG have been amended as follows: